The role of insurance solutions in climate resilience

Introduction

One might not immediately associate the concepts of insurance and climate change, but they are intimately linked.

A virtual panel discussion in May 2022, organized and moderated by Tata Consultancy Services (TCS) and hosted by the Global Adaptation and Resilience Investment (GARI) Working Group, explored how insurance is a critical piece of the puzzle for driving action on climate change and reducing exposure to climate risk. How is this the case? As Lauren Carter of the UN Development Programme (UNDP), one of the panelists and an insurance and climate finance expert, put it, insurance propels forward three vital solutions: 

• Investing its financial capital in the climate-smart infrastructure of the future 

• Underwriting insurance policies that reduce the financial exposure of the poor and most vulnerable populations to climate-related extreme events 

• Creating incentives for the private sector to value climate adaptation and invest in it

All three solutions are critical to capital formation, that is, building the physical, financial, social, and human assets and systems necessary to deliver climate change solutions. During the webinar, panelists Bridget Gainer, Global Head of Public Affairs and Policy at Aon, a global reinsurance company; Lauren Carter, Deputy Team Lead of the UNDP’s Insurance and Risk Finance Facility (IRFF); and Abhisheik Dhawan, Sustainable Finance and Partnership Specialist at the UN Capital Development Fund (UNCDF) and convener of the insurance working group CILRIF, unpacked these issues. Click here to know what the experts had to say.

Recurring natural disasters and their impact

The losses from extreme weather events are already a big and growing problem.

And, their impact is more pronounced – rather, damaging – for the underprivileged. From 2006 to 2021, the inflation-adjusted insured losses from natural disasters have doubled. Economic losses from disasters cost the poorest countries an average of USD 29 billion annually. With very low loss coverage through insurance, the impacted population is forced to bear response and reconstruction expenses or rely on foreign aid – a phenomenon known as the protection gap. 

Climate change is only increasing the frequency and intensity of such disasters and amplifying the destructive impacts. The world’s leading scientists are sounding the alarm on the insufficiency of a society’s response to this mounting challenge.
 

The insurance industry: A sleeping giant?

There is a significant gap between infrastructure investment in developing countries today and what is required by 2050, to ensure climate resilience.

Little appreciated outside of the financial sector is the fact that the insurance industry is among the world’s largest managers of investment capital: as of 2021, insurers worldwide owned more than $ 40 trillion in assets. Today, the insurance industry is not a major player in deploying financial capital to help build resilient communities and reduce vulnerability to climate impacts – but that could change.
 

Innovative solutions take root

The resources of the insurance sector can help solve the challenges related to global climate risks.

In September 2021, The United Nations Development Programme (UNDP) announced a new flagship initiative — the Insurance and Risk Finance Facility (IRFF), within its Finance Sector Hub. The facility will strengthen the protection of vulnerable communities from socio-economic, climate, and health-related disasters, by significantly increasing the role of insurance and risk financing in development. Another initiative advanced by the UNCDF, the Climate Insurance Linked Resilient Infrastructure Finance (CILRIF) Working Group is similarly oriented toward developing and deploying innovative financial solutions for closing the protection gap and financing climate resilience at scale. In addition to these, the panel explored cutting-edge insurance products helping to protect and restore vital natural capital and customized policies for regions that are susceptible to flooding and other natural disasters.